About-Face in Bullish Sentiment May Spark a Drop

On Sept. 7, I wrote about how the market rally could continue due to the Investors Intelligence report showing a bearish percentage of 37.7 percent and a bullish percentage of 29.4 percent. Since I wrote that blog entry, the S&P has climbed 6.9 percent.

Unfortunately, the S&P isn’t the only thing that has jumped during the last five weeks.

The newsletter writers that comprise the Investors Intelligence Advisors’ Sentiment Report have turned to bullish from bearish in short order.

Last week’s report showed the bulls had jumped to 45.6 percent and the bears had fallen to 28.3 percent. This reflects a major jump in bullish sentiment and it comes as the weekly stochastic readings are hitting the most overbought levels since the top in April.

During the last two years, the key levels for the Investors Intelligence report have been 50 percent and 20 percent. When the bullish percentage reaches 50 percent or higher, the market has slowed down and in most cases experienced a pullback.

The market has pulled back the most when the bearish percentage dropped below 20 percent at the same time the bullish percentage was reaching 50 percent.

Keep an eye on the Investors Intelligence report during the next few weeks. Should the bullish percentage reach 50 percent and the bearish percentage should drop to 20 percent, we could see a correction.

This might not be the news investors are looking for heading into earnings season, but you can’t argue with previous signals.